BoE Policy Meeting in Focus

Yesterday, the Bank of England met market expectations in holding their benchmark policy rate at 5.25%, marking their fifth consecutive hold.

The subsequent market reaction saw sterling sell off given a relatively dovish vote. Here, against market expectations that seven MPC members would vote for a hold alongside one favouring a cut and another favouring a hike, yesterday’s decision showed eight voting for a hold and one voting for a cut.

With no members favouring for hike, money markets were pricing in around 75bps worth of cuts from the BOE this year during yesterday’s session (up from 63bps being priced in at the start of the week).

The policy meeting minutes acknowledged that “CPI inflation is projected to fall to slightly below the 2% target in 2024 Q2, marginally weaker than previously expected owing to the freeze in fuel duty announced in the Budget. In the February Report projection, CPI inflation was expected to increase slightly again in Q3 and Q4, accounted for by the direct energy price contribution to 12-month inflation.”

This comes as headline inflation for February – released on Wednesday – showed signs of falling to its lowest level since September 2021. On this, the BoE’s minutes stated that this could be “largely be attributed to falls in food and core goods price inflation”.

Nevertheless, as we looked at previously, the Consumer Prices Index including owner occupiers’ housing costs eased only marginally from 6.1% to 6.0%, demonstrating that the average UK household continues to face considerable inflationary pressures. Policy makers acknowledged this in the minutes, stating that “there were limited signs so far that services price inflation would return to a target-consistent pace sufficiently rapidly, with evidence of diminishing second-round effects still tentative.” Hence, notwithstanding a relatively dovish policy meeting, committee members identified that “some upside risks remained around both the wage and CPI inflation projections”.

UK retail sales figures managed to keep their head above water this morning, coming in flat against market expectations of a 30bps fall between January and February 2024. Here, online sales managed to rise 2.1% on the month, which represented the greatest level of increase since July 2023.

Also seeing an uptick in volume was retail outlets selling clothing, which rose 1.7%, and department stores which rose 1.6%. This was offset by decreases in fuel and food sales with the ONS’ senior statistician citing the rise in price of the former as a possible reason.

The beat has been met with commentary that it gives some room for cautious optimism that the UK economy may be recovering from the technical recession that it entered at the back end of H2 2023. On an annual basis however, retail sales fell 40bps following an uptick of 50bps over January.

The DXY dollar index has risen to its highest level in over a month as markets weigh up whether the Fed may hold off cutting rates before other central banks ease on theirs. For example, yesterday the SNB cut its benchmark policy rate by 25bps to 1.5% – in what was the central bank’s first cut in almost a decade. Meanwhile markets are pricing in around a 86% chance of the ECB cutting in June against a 65% chance that the Fed will cut in June.